Breakeven analysis : midcontinent oil & gas price

James :M. 'Revard
'Executive Director
'Brad J{enry
Governor
State of ok.Cafiorna
Commission on :Marginaffy Producing o«and (jas Wefts
May 22nd, 2009
In an effort to continue our educational programs, the Oklahoma Marginal Well Commission
has recently completed a survey of marginal well operators, entitled "Breakeven Analysis". The results of
the survey clearly demonstrate that with current oil and gas prices, the marginal well producers are
struggling to make profits, and natural gas operators are losing money. One of the Marginal Well
Commission's main goals is to prevent wells from being shut in or plugged.
With the current tax policy proposed by President Obama's administration, the burden on the
independent oil and gas operator, and the current market price of oil and gas, the industry is facing very
difficult times that will halt drilling activity, end most maintenance work and ensure layoffs of thousands.
The aforementioned budget proposes $31.5 billion in new taxes on the independent producer. These new
tax increases include repeals of the expensing of intangible drilling costs, of percentage depletion, of the
marginal well tax credit, of the enhanced oil recovery credit, and of the manufacturing tax deduction.
These policies would ensure that more Oklahoma marginal wells will be shut in or plugged.
The Oklahoma oil and gas industry employs more than 76,000 workers, provides more than 322,000 direct
and indirect jobs in the state of Oklahoma, and generates more than $2 billion in taxes to the state of
Oklahoma. The independent oil and gas operators contribute 68% of American oil production and 82% of
the overall American natural gas production. In the state of Oklahoma, 68% of all oil production comes
from marginal wells and $1.08 billion in gross production tax comes from marginal wells.
James M. Revard'
Txecutive 'Director
'Brad Jfenry
governor
State of Okfalioma
Commission on :Marginaffy Producing o«and (jas WefLS
The survey further supports the importance of the tax credits currently allowed. If President Obama's
proposal passes, it will greatly impact the state's economy while crippling the Oklahoma oil and gas industry. We
hope that this study demonstrates that the marginal well operator is already working with very slim profit margins
and any new tax burden will signal the end of these hard working American businesses.
The Oklahoma Marginal Well Commission thanks all the individuals who work in this industry to supply
Oklahoma and our entire nation with energy. Wewill continue our efforts to educate the public of the importance of
the independent oil and gas producer.
Kind regards,
James M. Revard
fames N, Revard'
'Executive 'Director
'Brad :Jfenry
(jovernor
State of Okfalioma
Commission on :M.arginaffy Producing oaana (jas WeftS
On behalf of the Oklahoma Marginal Well Commission, I would like to thank all the survey
participants and also Spears & Associates for committing their time and resources to the 'Marginal
Well Break-even Analysis'.
This study is important on many levels and helps better align the Marginal Well
Commission to its purpose of protecting and promoting our state's rroduction of crude oil and
natural gas and to serve the state by making sure that our most vita resource is continuously
produced and not prematurely abandoned. One of our main responsibilities is to serve the public
as an information source regarding the importance of the industry to their lives and the state in
which they live.
This study is a great tool to help us do all these things as well as assisting the Marginal
Well Commission to carryout one of our vision statements; to inform the public and the state
legislature of the importance of marginal production in Oklahoma and the nation by helping
facilitate studies of economics and demographics of the industry. It is our hope that this study will
do just that: Serve as a tool to help in the creation of laws and public policy that promotes and
protects our state's most valuable resource.
Again, we thank you for your assistance with the Marginal Well Commission on this study!
This analysis is clearly a great benefit to the industry and our state and nation.
Sincerely,
Rick Torix
Oklahoma Marginal Well Commission
Prepared by
Breakeven Analysis
MidContinent Oil & Gas Price
Marginal Well Commission
Spears & Associates, Inc.
5110 South Yale, Suite 410
Tulsa, Oklahoma 74135
918.496.3434
Primary author:
Richard Spears
28April2009
Breakeven Oil Price
Breakeven Price of Oil
Survey of 100 MidContinent Oil Producers
-$45 average breakeven price
Spears and Oklahoma's Marginal Well Commission
asked -100 E&P companies active in Texas, Oklahoma,
Kansas and Arkansas about their breakeven price of oil.
The sample included producers with 5 wells and
producers with thousands of wells.
We let each company define "breakeven", but the intent
was to discover the price of oil that producers needed to
SUSTAIN their current business, but not necessarily to
EXPAND their business through additional drilling.
The chart to the right plots the responses by oil price
range. For example, one operator said that his
breakeven price of oil is $11-15 per barrel while two
operators reported that breakeven is $76-80 per barrel.
We believe this to be a normal distribution.
Average breakeven oil price is $44.73 per barrel.
Current Cushing WTI Spot Market oil price is -$48,
which suggests that well over half of these oil producers
are losing money.
Worth noting: Breakeven economics did not
correlate at all with the number of wells being
operated.
20
18
16
IQn) 14 In c: 12 0 a.
In
a-Q:): 10 0 8 ~
Q) .c 6 Ez:::l 4
2
0
Average.: $44.73 pel..,•.•••••
• I I I I I I 1
om~~NNww~~~~mm~~oo UI1 ..I..•. ~I m~I m~I m~Im~Im~Im~Im~I I I I I I I I O~N~Now~wo~~~o~~~om~mo~~~oo~ooo~o
Oil Price Range ($/bbl)
Breakeven Natural Gas Price
Breakeven Price of Natural Gas
Survey of 100 MidContinent Gas Producers
$4.66 average breakeven price
Along with our survey of oil producers, Spears and
Oklahoma's Marginal Well Commission asked -100 E&P
companies active in Texas, Oklahoma, Kansas and
Arkansas about their breakeven price of natural gas.
The sample included producers with 5 wells and
producers with thousands of wells.
We let each company define "breakeven", but the intent
was to discover the price of natural gas that producers
needed to SUSTAIN their current business, but not
necessarily to EXPAND their business through additional
drilling.
The chart to the right plots the responses by gas price
range. For example, two operators said that breakeven
price of gas is $2.01-2.50 per MCF while four operators
reported that breakeven is $6.51-7.00.
Average breakeven natural gas price is $4.66 per MCF.
Current Henry Hub Spot Market oil price is $3.18, which
suggests that most of these gas producers are losing
money.
10
9
8
t/) 7 Q)
t/) c::: 6 0 Co
tQ/)) 5 c: - 4 0~
.Qc) 3
Ez:::J 2
1
0
Average:
t1:iI -_ ••• _-
r--e-' - - - -
t-- I - ~ - ~ :t ? c.,. ....•. ....•. ~ ~ (.U !-.Y ~ ~ !Jl 01 0> ?> .....•
....•. <:> 01 0 01 <:> 01 <:> 01 0 01 <:> 01 <:>
01 I ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•.
0 ....•. I I I I I I I I I I I I I <:> ....•. N ~ (.U (.U ~ ~ 01 !Jl 0> 0> .....• .....•
0 c.,. <:> 01 <:> 01 <:> 01 <:> 01 <:> c.,. <:> 01
0 0 0 0 0 0 0 0 0 0 0 0 0
Natural Gas Price Range ($/MCF)
Spears & Associates, Inc.
Description
Spears & Associates has specialized in evaluating oilfield
equipment and service markets and companies worldwide since
1965. The firm has completed -2000 custom oilfield market
research projects around the world and worked for 270
companies in 2008.
2008 Client Profile
Clients Number
The firm is headquartered in Tulsa and has consultants in
Florida, Missouri, Texas and the Rockies.
Oilfield Service 136
Producers 46
Principals of the firm include:
Steel Mills 21
John Spears President
Author, Drilling & Production Outlook Financial 67
Richard Spears Vice President
Author, Oilfield Market Report
Total
Kurt Minnich Project Manager
Publisher, Pipe-Logix
Spears & Associates, Inc.
Copyright 2009, Spears and Associates, Inc. All rights reserved.
This communication is confidential and is provided to clients of Spears and Associates, Inc. for their lawful use. This
communication may not be disclosed, copied or disseminated, in whole or in part, without the prior written permission of Spears
and Associates, Inc. The report and its contents are the property of Spears and Associates Inc. and are protected by applicable
copyright, trade secret or other intellectual property laws.
Spears and Associates, Inc. provides market research services to the petroleum industry, but does not provide investment
banking services. From time to time Spears and Associates, Inc. will provide market research consulting services to some of
the oilfield service companies mentioned in this report for which the firm is compensated.
Disclaimer:
This communication is based on information that Spears and Associates, Inc. believes is reliable. However, Spears and
Associates, Inc. does not represent or warrant its accuracy, completeness, or any other aspect of this information. The
viewpoints and opinions expressed in this report represent the views of Spears and Associates, Inc. as of the date of this
report. These viewpoints and opinions may be subject to change without notice. This message should not be considered as a
recommendation to buy or sell any securities. In no event shall Spears and Associates, Inc. be liable for incidental or
consequential damages associated with reliance on any statement or opinion contained in this report.
Important Disclosures:
The following analysts were involved in creating or supervising the content of this report: Richard Spears, John Spears, and
Kurt Minnich. These analysts certify that the views and opinions expressed in this report accurately reflect their personal views.
None of these analysts (or members of their household) has a long or short position in any publicly traded oilfield equipment or
service stock. These analysts have not and will not receive direct or indirect compensation in return for expressing specific
viewpoints in this report.
MAY 2 ~ Z011

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James :M. 'Revard
'Executive Director
'Brad J{enry
Governor
State of ok.Cafiorna
Commission on :Marginaffy Producing o«and (jas Wefts
May 22nd, 2009
In an effort to continue our educational programs, the Oklahoma Marginal Well Commission
has recently completed a survey of marginal well operators, entitled "Breakeven Analysis". The results of
the survey clearly demonstrate that with current oil and gas prices, the marginal well producers are
struggling to make profits, and natural gas operators are losing money. One of the Marginal Well
Commission's main goals is to prevent wells from being shut in or plugged.
With the current tax policy proposed by President Obama's administration, the burden on the
independent oil and gas operator, and the current market price of oil and gas, the industry is facing very
difficult times that will halt drilling activity, end most maintenance work and ensure layoffs of thousands.
The aforementioned budget proposes $31.5 billion in new taxes on the independent producer. These new
tax increases include repeals of the expensing of intangible drilling costs, of percentage depletion, of the
marginal well tax credit, of the enhanced oil recovery credit, and of the manufacturing tax deduction.
These policies would ensure that more Oklahoma marginal wells will be shut in or plugged.
The Oklahoma oil and gas industry employs more than 76,000 workers, provides more than 322,000 direct
and indirect jobs in the state of Oklahoma, and generates more than $2 billion in taxes to the state of
Oklahoma. The independent oil and gas operators contribute 68% of American oil production and 82% of
the overall American natural gas production. In the state of Oklahoma, 68% of all oil production comes
from marginal wells and $1.08 billion in gross production tax comes from marginal wells.
James M. Revard'
Txecutive 'Director
'Brad Jfenry
governor
State of Okfalioma
Commission on :Marginaffy Producing o«and (jas WefLS
The survey further supports the importance of the tax credits currently allowed. If President Obama's
proposal passes, it will greatly impact the state's economy while crippling the Oklahoma oil and gas industry. We
hope that this study demonstrates that the marginal well operator is already working with very slim profit margins
and any new tax burden will signal the end of these hard working American businesses.
The Oklahoma Marginal Well Commission thanks all the individuals who work in this industry to supply
Oklahoma and our entire nation with energy. Wewill continue our efforts to educate the public of the importance of
the independent oil and gas producer.
Kind regards,
James M. Revard
fames N, Revard'
'Executive 'Director
'Brad :Jfenry
(jovernor
State of Okfalioma
Commission on :M.arginaffy Producing oaana (jas WeftS
On behalf of the Oklahoma Marginal Well Commission, I would like to thank all the survey
participants and also Spears & Associates for committing their time and resources to the 'Marginal
Well Break-even Analysis'.
This study is important on many levels and helps better align the Marginal Well
Commission to its purpose of protecting and promoting our state's rroduction of crude oil and
natural gas and to serve the state by making sure that our most vita resource is continuously
produced and not prematurely abandoned. One of our main responsibilities is to serve the public
as an information source regarding the importance of the industry to their lives and the state in
which they live.
This study is a great tool to help us do all these things as well as assisting the Marginal
Well Commission to carryout one of our vision statements; to inform the public and the state
legislature of the importance of marginal production in Oklahoma and the nation by helping
facilitate studies of economics and demographics of the industry. It is our hope that this study will
do just that: Serve as a tool to help in the creation of laws and public policy that promotes and
protects our state's most valuable resource.
Again, we thank you for your assistance with the Marginal Well Commission on this study!
This analysis is clearly a great benefit to the industry and our state and nation.
Sincerely,
Rick Torix
Oklahoma Marginal Well Commission
Prepared by
Breakeven Analysis
MidContinent Oil & Gas Price
Marginal Well Commission
Spears & Associates, Inc.
5110 South Yale, Suite 410
Tulsa, Oklahoma 74135
918.496.3434
Primary author:
Richard Spears
28April2009
Breakeven Oil Price
Breakeven Price of Oil
Survey of 100 MidContinent Oil Producers
-$45 average breakeven price
Spears and Oklahoma's Marginal Well Commission
asked -100 E&P companies active in Texas, Oklahoma,
Kansas and Arkansas about their breakeven price of oil.
The sample included producers with 5 wells and
producers with thousands of wells.
We let each company define "breakeven", but the intent
was to discover the price of oil that producers needed to
SUSTAIN their current business, but not necessarily to
EXPAND their business through additional drilling.
The chart to the right plots the responses by oil price
range. For example, one operator said that his
breakeven price of oil is $11-15 per barrel while two
operators reported that breakeven is $76-80 per barrel.
We believe this to be a normal distribution.
Average breakeven oil price is $44.73 per barrel.
Current Cushing WTI Spot Market oil price is -$48,
which suggests that well over half of these oil producers
are losing money.
Worth noting: Breakeven economics did not
correlate at all with the number of wells being
operated.
20
18
16
IQn) 14 In c: 12 0 a.
In
a-Q:): 10 0 8 ~
Q) .c 6 Ez:::l 4
2
0
Average.: $44.73 pel..,•.•••••
• I I I I I I 1
om~~NNww~~~~mm~~oo UI1 ..I..•. ~I m~I m~I m~Im~Im~Im~Im~I I I I I I I I O~N~Now~wo~~~o~~~om~mo~~~oo~ooo~o
Oil Price Range ($/bbl)
Breakeven Natural Gas Price
Breakeven Price of Natural Gas
Survey of 100 MidContinent Gas Producers
$4.66 average breakeven price
Along with our survey of oil producers, Spears and
Oklahoma's Marginal Well Commission asked -100 E&P
companies active in Texas, Oklahoma, Kansas and
Arkansas about their breakeven price of natural gas.
The sample included producers with 5 wells and
producers with thousands of wells.
We let each company define "breakeven", but the intent
was to discover the price of natural gas that producers
needed to SUSTAIN their current business, but not
necessarily to EXPAND their business through additional
drilling.
The chart to the right plots the responses by gas price
range. For example, two operators said that breakeven
price of gas is $2.01-2.50 per MCF while four operators
reported that breakeven is $6.51-7.00.
Average breakeven natural gas price is $4.66 per MCF.
Current Henry Hub Spot Market oil price is $3.18, which
suggests that most of these gas producers are losing
money.
10
9
8
t/) 7 Q)
t/) c::: 6 0 Co
tQ/)) 5 c: - 4 0~
.Qc) 3
Ez:::J 2
1
0
Average:
t1:iI -_ ••• _-
r--e-' - - - -
t-- I - ~ - ~ :t ? c.,. ....•. ....•. ~ ~ (.U !-.Y ~ ~ !Jl 01 0> ?> .....•
....•. 01 0 01 01 01 0 01 01
01 I ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•. ....•.
0 ....•. I I I I I I I I I I I I I ....•. N ~ (.U (.U ~ ~ 01 !Jl 0> 0> .....• .....•
0 c.,. 01 01 01 01 c.,. 01
0 0 0 0 0 0 0 0 0 0 0 0 0
Natural Gas Price Range ($/MCF)
Spears & Associates, Inc.
Description
Spears & Associates has specialized in evaluating oilfield
equipment and service markets and companies worldwide since
1965. The firm has completed -2000 custom oilfield market
research projects around the world and worked for 270
companies in 2008.
2008 Client Profile
Clients Number
The firm is headquartered in Tulsa and has consultants in
Florida, Missouri, Texas and the Rockies.
Oilfield Service 136
Producers 46
Principals of the firm include:
Steel Mills 21
John Spears President
Author, Drilling & Production Outlook Financial 67
Richard Spears Vice President
Author, Oilfield Market Report
Total
Kurt Minnich Project Manager
Publisher, Pipe-Logix
Spears & Associates, Inc.
Copyright 2009, Spears and Associates, Inc. All rights reserved.
This communication is confidential and is provided to clients of Spears and Associates, Inc. for their lawful use. This
communication may not be disclosed, copied or disseminated, in whole or in part, without the prior written permission of Spears
and Associates, Inc. The report and its contents are the property of Spears and Associates Inc. and are protected by applicable
copyright, trade secret or other intellectual property laws.
Spears and Associates, Inc. provides market research services to the petroleum industry, but does not provide investment
banking services. From time to time Spears and Associates, Inc. will provide market research consulting services to some of
the oilfield service companies mentioned in this report for which the firm is compensated.
Disclaimer:
This communication is based on information that Spears and Associates, Inc. believes is reliable. However, Spears and
Associates, Inc. does not represent or warrant its accuracy, completeness, or any other aspect of this information. The
viewpoints and opinions expressed in this report represent the views of Spears and Associates, Inc. as of the date of this
report. These viewpoints and opinions may be subject to change without notice. This message should not be considered as a
recommendation to buy or sell any securities. In no event shall Spears and Associates, Inc. be liable for incidental or
consequential damages associated with reliance on any statement or opinion contained in this report.
Important Disclosures:
The following analysts were involved in creating or supervising the content of this report: Richard Spears, John Spears, and
Kurt Minnich. These analysts certify that the views and opinions expressed in this report accurately reflect their personal views.
None of these analysts (or members of their household) has a long or short position in any publicly traded oilfield equipment or
service stock. These analysts have not and will not receive direct or indirect compensation in return for expressing specific
viewpoints in this report.
MAY 2 ~ Z011